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A prime way to establish a strong foundation for profit-making in 2012: home-builder stocks.

Boosted by the beginnings of a housing recovery, PulteGroup and Lennar ranked among the 10 largest gainers in the S&P 500. Pultegroup nearly quadrupled—shares rose 182% to $17.61. Lennar, meanwhile, increased 94% to $37.80.

For sure, some of these gains came because of better industry-wide conditions. Confidence among home-builders is quite elevated. Housing starts and prices considerably improved, and the inventory of foreclosed property continues to slowly dwindle. Both Pulte and Lennar managed this period well.

Pulte's CEO Jim Zeumer promised better returns on capital, and he delivered on that by better managing the company's margins and inventory. Zeumer has craftily avoided tying up Pulte's resources in land ownership. He instead has used option contracts to control project sites. As for Lennar, the largest U.S. home-builder, it reduced the incentives and promotions it once needed to get folks across the threshold. Plus, Lennar focuses on more tony areas that command higher prices.

Lennar still trades at an attractive level: less than 13 times estimated 2012 earnings of $2.99 a share. Pulte looks more fully priced. That stock fetches 26 times estimated 2012 earnings of 68 cents a share. Bulls like RBC Capital Markets' Robert Wetenhall think Pulte merits the high price. "We think the stock's current valuation fails to accurately reflect our view that Pulte will deliver earnings growth which exceeds investor expectations," he says.

Analysts generally foresee three to five years of increasing construction. Some think housing starts could reach 1 million by 2014, above the half a million seen in the low of 2009. Though no one expects housing stocks to earn at the level seen in the housing bubble, when analysts regularly expected $8 a share in profit.

As the smart money bought those stocks, it avoided some names in education and retail.

Apollo Group, the largest for-profit education provider, is viewed as the leader in an unsustainable market. For-profit education experienced wild, unrestrained growth in the last decade, and Apollo shares shot from $35 in Nov. 2006 to $89 in Jan. 2009. Now, uncomfortable questions are being raised about the quality of the education. How valuable is that degree from the University of Phoenix? A slip of paper that students mostly earned on the Web, not in any classroom in the Grand Canyon State. Apollo lost 62% this year, and now trades near $20 a share.

In retail, Best Buy (down 51%) and J.C. Penney (45%) both suffered heavy losses. Each is trying to complete a difficult turnaround. Best Buy is trying to shrink its big-box stores, and become more competitive online. (While Best Buy is still a giant, doing some $50 billion in sales, it doesn't dominate the Web like it does physical retail.) J.C. Penney's new CEO Ron Johnson, meanwhile, hopes to make the 110-year-old company into something totally different. With new technology, wider aisles and classier brands, he wants to transition J.C. Penney to a specialty retailer that doubles as a hang-out location spot. He hopes that yoga classes, Wi-Fi and coffee bars can help bring in new customers. He badly needs that to work. The company has weakened, says Baird analyst Erika Maschmeyer, and J.C. Penney's core customers have defected. Sales at established locations fell by more than 25% in the last quarter.

The selloff in these losers have contracted multiples, but only the value investors with nerves of steel might proceed. Each traded at significant discounts to book value compared to the industry average: J.C. Penney sells at 1.2 times (industry average: 2 times) and Best Buy at 1.1 (industry average: 4.3 times). J.C. Penney recently received some rare rating upgrades. Even that, though, was only seen as a short-term situation.